The last couple of decades have been a fascinating time in the financial services industry. We have seen some seismic shifts in the products available and how business is done.
If you mention ‘visiting the bank manager to talk about getting a loan’ to the modern day consumer they will look at you quizzically, at best. To many you may as well be from ancient Greece or Egypt than the 21st century.
These days it is all big data, external indicators, machine learning and scoring algorithms. Apply online, service online, there is an app for everything, there are niche loans for niche segments. The world has indeed changed.
Growth in a new lending market
Over the last few years, traditionally structured loans have been under pressure, regulators have tightened control requirements and margins have been squeezed. Many large retail lenders simply raised their approval criteria, only taking on the best, lowest risk customers in order to stay competitive.
This undoubtedly reduced the availability of credit for some segments of the population and created a gap in the market. Into that gap has stepped a whole suite of new entrants, the alternative lending products; mid-market loans, guarantor loans, payday loans and more.
These products have clearly answered this market demand and together with innovative use of technology they have quickly become a large part of the lending industry.
Under the microscope
This growth has also generated a lot of media attention, especially the ‘payday loan’ sector. These companies offer short term loans, traditionally have a high risk of default and interest rates are high (Over 1000% in some cases). Collection practices have tended to be assertive in order to recover loans too.
With all the media attention and rising levels of complaints, regulatory attention has followed.
Now of course, it is clear is that at some companies there have been some unpalatable and sharp practises. These needed to be corrected and are something most of the industry would not endorse. However a recent report highlighting a continued rise in levels of complaints shows there is still more to do.
Learning from innovation
As collections and recoveries professionals, we have watched all these developments with interest.
In some ways the industry has represented terrific innovation; scoring, data centric decision making, digital app development and state of the art collections technology.
However some innovative practise have come at the expense of customer treatment, being overly aggressive with rates that add financial burden for some that can least afford it.
It is clear the traditional lenders have plenty to learn from the alternative sector, and the alternative lenders have plenty to learn from the more traditional sector. However, the real question is where do we go from here, what’s next.
Experience of youth
Much like teenagers with the energy and enthusiasm of youth, the alternative lending market is gradually changing the lending business. Some could become the product leaders of the future.
However in lending, experience of the long term credit cycle is also invaluable and (as the banking industry has repeatedly found), to be the leader you need to survive the next economic downturn and subsequent credit crisis.
Surviving economic shocks
By the nature of their business model some alternative lenders taken on additional risk and as such are much more sensitive to any economic shock. It is important to understand this risk and ensure there are robust collections practices in place.
This needs to be done with care, in the new regulatory world, as the days of being able to suppress losses through aggressive actions are now gone (and this is a good thing).
However the good news is by understanding and treating customers fairly, it is possible to limit the risk and put yourselves higher up the payment hierarchy. Providing better service can indeed can pay off.
Becoming the best
With market demand, the sector is here to stay and it is critical for their customers that the sector is competitive, filled with companies offering reputable products at reasonable pricing at a level they can afford. For the rest of the industry, it is exciting to watch the levels of innovation underway and consider how this could be leveraged in other sectors.
We should all take note and have plenty to learn from each other.
Chris Warburton, Lead Consultant